1 Big Catalyst Advanced Micro Devices Investors Should Watch in 2019

Advanced Micro Devices (NASDAQ: AMD) stock lost ground in late 2018 after losing a critical crypto catalyst that was driving up the sales and prices of graphics cards. Sliding GPU (graphics processing unit) prices and excessive channel inventory mean that AMD is now in a spot of bother, as these two factors are going to affect its near-term growth.

In fact, AMD's sales are expected to drop on an annual basis over the next couple of quarters. Additionally, analysts predict that the chipmaker's revenue will grow just 6% in 2019, which is significantly lower than 2018's predicted revenue growth of 22%. But there's one catalyst that could help the company power ahead of expectations and deliver a solid performance next year and beyond.

A gold mine

AMD has already made a mark in the data center space with its EPYC processors, and it has now trained its sights on the data center GPU market. The company recently revealed two data-center-specific GPUs built on the 7-nanometer (nm) manufacturing node: the AMD Radeon Instinct MI60 and MI50 accelerators. These GPU accelerators are the first of their kind, as rival NVIDIA (NASDAQ: NVDA) is yet to move to the 7nm manufacturing process.

This move makes it clear that AMD is now looking to take the game to NVIDIA in data center GPUs, where the latter has been ruling the roost. NVIDIA's data center business has been enjoying solid momentum over the past several quarters. Its growth has been driven by demand from major cloud service providers who are looking to tackle complex workloads related to artificial intelligence, machine learning, and high-performance computing.

More specifically, NVIDIA's data center revenue shot up 58% annually during the last reported quarter. The company has generated $2.85 billion in revenue from this business over the trailing 12 months, and it estimates that there's still a lot of room for growth. In fact, NVIDIA believes that the total addressable market for data center GPUs could hit $50 billion by 2023.

By comparison, the size of the overall data center accelerator market (which includes other chips apart from GPUs) was worth an estimated $2.84 billion in 2018, according to third-party estimates. This indicates that NVIDIA is indeed the dominant provider of GPUs for data centers, and it looks primed to make the most of this opportunity thanks to its early move into this space.

But AMD's entry into this market with cards based on an advanced manufacturing process could help it get ahead.

AMD's play

NVIDIA claims that its Tesla V100 is "the most advanced data center GPU ever built," and it is manufactured using a 12nm process. Clearly, AMD is trying to bring a more capable and power-efficient chip to the market with TSMC's advanced 7nm manufacturing node.

A smaller die size means that more transistors are closely placed next to each other in a chip, so electrons need to travel a shorter distance. That makes the chips built on a smaller node deliver a stronger performance per watt of electricity consumed. AMD is trying to capitalize on this point to cut into NVIDIA's dominance.

The good part: AMD already has access to established sales channels in the data center space thanks to its EPYC server chips. EPYC has been chosen by 14 partners across North America and Asia for use in at least 50 server platforms. More importantly, AMD has managed to gain market share against chip giant Intel, which dominates the server processor market, so it won't be surprising if it can do the same against NVIDIA.

Plenty of room

It will be difficult topping NVIDIA's data center GPU dominance because its chips are already being used by major cloud players such as Amazon, Microsoft, and Google. Additionally, the company has kept pushing the envelope by introducing new products.

But the massive size of the data center GPU market means that there's a place for more than one player to attack this opportunity. In fact, if AMD manages to capture even 20% of the data center GPU market in the next five years, it would be a big deal, as that would dwarf its trailing 12-month revenue of $6.5 billion.

As such, AMD investors should closely watch how its data center GPUs perform in 2019, since they have the potential to change the company's fortunes big-time.

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